National Institute of Technology 2009-1st Sem M.B.A International Business IV Sem - - Question Paper

Thus, Boeing has had to face up to the fact that its ability to raise prices for commercial jet aircraft, which was once quite strong, has now been severely limited. Failing prices might even be the norm. If prices are under pressure, the only way Boeing can continue on to make a profit is if it also drives down its cost structure. With this in mind, in the early part of the 1990’s, Boeing undertook a companywide review of its make or buy decisions. The objective was to identify activities that could be outsourced to subcontractors, both in the United States and abroad to drive down production costs.

When making these decisions, Boeing applied a number of criteria. First, Boeing looked at the basic economics of the Outsourcing decision. The problem here was whether an activity could be performed more cost-effectively by an outside manufacturer or by Boeing. Secondly, Boeing considered the strategic risk associated with Outsourcing an activity. Boeing decided that it would not outsource any activity that it deemed to be part of its long-term competitive advantage. For example, the company decided not to outsource the production of wings because it believed that doing so might provide away valuable technology to potential competitors. Thirdly, Boeing looked at the operational risk associated with outsourcing an activity. The basic objective was to make sure Boeing did not become too dependent on a single outside supplier for critical components. Boeing’s philosophy is to hedge operational risk by purchasing from 2 or more suppliers. Finally, Boeing considered whether it made sense to outsource certain activities to a supplier in a provided country to help secure orders for commercial jet aircraft from that country. This practice known as offsetting is common in many industries. For example, Boeing decided to outsource the production of certain components to China. This decision was influenced by the fact that current forecasts suggest that the Chinese will purchase over $100 billion worth of commercial jets over the next 20 years. Boeing’s hope is that pushing a few subcontracting work China’s way will help it gain a larger share of this market than its global competitor, Airbus.

Once of the 1st decisions to come out of this process was the decision to outsource the production of insulation blankets for 737 and 757 aircraft to suppliers in Mexico. Insulation blankets are wrapped around the inside of the fuselage of an aircraft to keep the interior warm at high altitudes, Boeing has traditionally made these blankets in-house, but it obtained that it can save $50 million per year by Outsourcing production to a Mexican supplier. In total, Boeing reckons that Outsourcing is complete the amount of an aircraft that Boeing builds will have been decreased from 52 percent to 48 percent.

Earning:   Approval pending.